Having a clear understanding of your income sources and anticipated expenses is crucial when planning for retirement. This knowledge can help you maintain a comfortable lifestyle, cover unforeseen costs, and even leave a legacy to your loved ones or charitable causes. Here’s a simple guide to creating an effective retirement cash flow plan.

1. Identify Your Income Sources

The foundation of most retirement plans includes employer-sponsored retirement accounts such as 401(k)s, Roth 401(k)s, or 403(b)s. Other potential income sources include traditional IRAs or Roth IRAs, Social Security, and pensions. Some retirees may also choose to work part-time during retirement to supplement their income. Additionally, income could come from rental properties, life insurance policies with a cash value, or even an inheritance.

Given the challenges of rising interest rates, inflation, and market fluctuations, diversifying your income sources is more important than ever. Multiple streams of income can provide more financial security and help ensure your savings last throughout retirement.

2. Estimate Your Expenses

To gauge your future expenses, start by analyzing your current spending. Separate your expenses into two categories: nondiscretionary (essential expenses) and discretionary (non-essential but desired expenses). Your wealth advisor can help you categorize and track your expenses, either through tools they provide or by recommending apps and software that can automate the process.

In addition, work with your advisor to account for taxes on retirement account withdrawals and the impact of inflation over time. It’s also crucial to include the rising costs of healthcare, especially long-term care. Statistically, 70% of people will need some form of long-term care during retirement, so planning for this expense is essential. You might need to tap into personal assets or purchase insurance to cover these costs, depending on your needs and expectations.

3. Implement a “Bucket” Strategy

A bucket strategy, also known as a time-segmentation strategy, helps you organize your retirement assets based on when you’ll need to access them. The idea is to categorize your cash flow into three distinct “buckets”:

• Short-term bucket: This includes liquid assets like cash and money market funds for day-to-day expenses and emergencies.
• Mid-term bucket: This contains assets you won’t need for at least five to ten years, such as bonds, CDs, and income-generating stocks.
• Long-term bucket: These are growth-focused investments aimed at outpacing inflation over a longer horizon.

As you use funds from your short-term bucket, you’ll want to refill it from your mid-term bucket. Your mid-term bucket can then be replenished from your long-term bucket. The advantage of this strategy is that it allows you to avoid selling long-term growth assets during market downturns. This approach reduces the risk of depleting your portfolio by forcing you to sell investments at a loss in the early years of retirement.

A bucket strategy also helps mitigate sequence-of-return risk, which refers to the potential negative impact of poor market returns early in retirement. By ensuring you have liquid assets for short-term needs, you can let your long-term investments recover before needing to sell them.

Consult With Your Wealth Advisor

To develop a solid retirement cash flow plan, it’s important to consult with your wealth advisor. They can help you design a customized bucket strategy, determine the right size for each bucket, and decide the best accounts to draw from. Your advisor will also help you minimize taxes while ensuring you have enough funds to cover your retirement needs.